United States: Favorable New Guidance On Eligibility Of Wind And Other Renewable Energy Facilities For The PTC Or The ITC In Notice 2013-60

On September 20, 2013, the Internal Revenue Service
("IRS") released Notice 2013-601 (the
"Notice"), which significantly clarifies
and expands the eligibility rules applicable to the investment tax
credit ("ITC") and production tax credit
("PTC") for wind and certain2 other
renewable energy facilities.

The IRS previously issued guidance (hereinafter, the
"Prior Guidance") providing two
alternative methods by which a taxpayer can demonstrate that
construction on a renewable energy facility has begun before
January 1, 2014, which is a prerequisite to claim the ITC or PTC.3
The first method requires a taxpayer to begin physical work of a
significant nature before January 1, 2014 (the
"Physical Work Test"). The second method
provides a safe harbor if at least 5% of the total cost of the
facility is paid or incurred before January 1, 2014 (the
"Safe Harbor"). The Prior Guidance
requires that for purposes of the Physical Work Test, taxpayers
must maintain a "continuous program of construction" (the
"Continuous Construction Test") and for
purposes of the Safe Harbor, taxpayers must make "continuous
efforts to advance toward completion of the facility" (the
"Continuous Efforts Test"). Satisfaction
of the Continuous Construction Test and the Continuous Efforts Test
are otherwise dependent on all facts and circumstances, but the
Prior Guidance contains a limited list of permissible delays that
would not cause a taxpayer to fail either test.

Although the additional guidance regarding when construction has
begun was helpful, practitioners have had a number of questions
regarding the application of the Prior Guidance including what
activities would constitute continuous progress toward completion,
the applicability of the Safe Harbor to equipment purchased under a
master contract for a number of components, and the effect that a
transfer of a facility after construction has begun will have on
its ability to qualify for the ITC or PTC. While it does not
provide answers to all questions raised in connection with
determining when construction has commenced, the Notice provides
welcome guidance on those important unresolved matters.

CONTINUOUS CONSTRUCTION.

The uncertainty arising from the use of a facts and
circumstances test was the subject of much discussion and
uneasiness for tax practitioners, developers and investors since
the issuance of the Prior Guidance. The subjective standard for
what qualifies as continuous construction has made it difficult for
tax advisors to issue tax

opinions regarding the eligibility of a facility for the ITC or
PTC. As a result of the difficulty of obtaining a tax opinion and
the risk of IRS audit, banks and tax equity investors have been
reluctant to provide financing to renewable energy facilities that
needed to commence construction prior to January 1, 2014. Moreover,
developers had cause for concern with respect to any delays in
construction or the availability of equipment such as turbines.

The Notice provides a safe harbor that will allow taxpayers to
be deemed to satisfy both the Continuous Construction and
Continuous Efforts Tests. Under the Notice, if a facility is placed
in service before January 1, 2016, the facility will be deemed to
have satisfied the Continuous Construction Test and the Continuous
Efforts Test. If a facility is not placed in service before January
1, 2016, whether the facility satisfies the Continuous Construction
or Continuous Efforts Tests will be determined by the relevant
facts and circumstances, as described in the Prior Guidance. This
bright-line standard should greatly increase the confidence of
parties to renewable energy transactions that facilities under
development will be eligible to claim the ITC or PTC. In
particular, for wind facilities which can be developed within a
fairly short timeframe, the two-year safe harbor should provide
significant comfort.

TRANSFERS AFTER CONSTRUCTION BEGINS.

The Prior Guidance raised a number of questions regarding
whether a transfer of a facility or an interest in a limited
partnership or LLC that was developing a facility after
construction begins would affect the facility's qualification
for the ITC or PTC. The Notice clarifies that a taxpayer seeking to
claim the PTC or ITC with respect to a particular facility need not
be the same taxpayer that began construction. Thus, the Notice
makes clear that a taxpayer that owns a qualified facility during
the 10-year period beginning with the date the facility is
originally placed in service may claim the PTC and, alternatively,
a taxpayer that owns a qualified facility on the date the facility
is originally placed in service may claim the ITC, even if the
taxpayer did not own the facility when construction began. This
clarification is significant because, without it, facilities would
have required the tax equity investors to effectively acquire their
interest at the beginning of development in order to claim the ITC
or PTC which is not a commercial reality. The change made by the
Notice is consistent with the statutory language and removes an
unnecessary impediment for transfers of facilities after
construction has commenced.

MASTER CONTRACT RULE.

The Prior Guidance included a rule for taxpayers wishing to
satisfy the Physical Work Test that provides generally that if a
taxpayer enters into a binding written contract for a specified
number of components to be manufactured, constructed or produced
for the taxpayer by another person, and then through a new binding
written contract assigns its rights with respect to certain of its
components to an affiliated special purpose vehicle that will own
the facility, work performed with respect to the master contract
will be taken into account in determining when physical work begins
with respect to the facility. The prior guidance did not expressly
apply this special rule to taxpayers seeking to apply the Safe
Harbor. The Notice makes clear that the master contract rule
applies for purposes of both the Physical Work Test and the Safe
Harbor. The costs associated with the assigned components therefore
will be taken into account in determining whether 5% of the costs
of the facility have been incurred before January 1, 2014.

guidelines should give parties to renewable energy transactions
greater certainty to ensure a facility's qualification for the
PTC or ITC with respect what constitutes a facility that is placed
in service prior to January 1, 2016.

Footnotes

1 2013-42 IRB 1.

2 In addition to wind facilities, the Notice applies to
closed and open-loop biomass facilities, geothermal facilities,
landfill gas facilities, trash facilities, qualified hydropower
facilities and qualified marine and hydrokinetic renewable energy
facilities but does not apply to solar facilities. The ITC is
available for solar projects placed in service prior to January 1,
2017.

3 On January 2, 2013, President Obama signed into law the
American Taxpayer Relief Act of 2012, which, among other things,
extended the PTC and the ITC to qualifying wind and certain other
renewable energy facilities, the construction of which begins
before January 1, 2014. Pub. L. No. 112-240. Our prior client alert
on the renewable energy provisions in the Act is available
here.

Because of the generality of this update, the information
provided herein may not be applicable in all situations and should
not be acted upon without specific legal advice based on particular
situations.

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